By: Sam Tenney, CFP, AIF
We are actively monitoring the news regarding Silicon Valley Bank (SVB) and other current economic events.
Why does this matter to you?
Rising interest rates and new banking regulations impact all investments. Could recent events with SVB, Signature Bank and others cause the Federal Reserve to pause raising interest rates? These are topics that will influence our investment positioning as we gather more clear information.
The closure of SVB is a big financial domino that has fallen, partially, as a result of the recent rapid increase in the Federal Reserve’s interest rate policy. SVB will not be the last domino to fall. This letter provides some insight into the recent events we are monitoring.
Silicon Valley Bank (SVB) was the 16th largest bank in the US. SVB was the financing and banking partner of approximately half of all tech startup companies in Silicon Valley. SVB underwent a run on the bank (which means withdrawal requests exceeded cash on hand), late last week. The bank was shut down by the FDIC on Friday.
SVB was more unique than most banks, in that 97% of deposits held with the bank were over the $250,000 amount that the Federal Deposit Insurance Corporation (FDIC) insures. Thus, most deposits were uninsured and at risk of at least a partial loss. On Sunday, the FDIC in connection with the US Treasury department and Federal Reserve created a backstop for all deposits at this bank and others that have been shut down.
Why did it happen?
SVB tripled in size from 2019 to 2022 increasing from approximately $60 billion in assets to around $200 billion. As a result, the bank invested large amounts of cash in government bonds and mortgage-backed bonds at historical low interest rates. Then, the Fed Reserve raised rates at a historically fast pace last year, which led to the banks bond investments falling in value. In addition, SVB’s business niche of venture capital was slowing rapidly in 2022 into 2023. The bank sought to firm up their financial balance sheet, so they sold some investments, and then tried to raise more capital from investors. The timing of both, and the previously disclosed losses on their investment portfolio spooked investors and depositors, which sparked a rapid run on the bank. The FDIC took over the bank on Friday. Just three days earlier, Moody’s rating agency had listed SVB with an A credit rating.
Bottom line, SVB grew too fast without proper planning or risk management by their executives. Poor timing exposed SVB lack of preparation, thus when the Federal Reserve’s policy turned to aggressively raising interest rates, combined with a business slowdown, SVB’s management mishandled these hurdles and accelerated their own financial crisis. As the tide of low interest rates went out, SVB got caught without their clothing, as Warren Buffett famously stated in a previous financial collapse.
What did the government do?
Government (FDIC, Federal Reserve & US Treasury) decided on Sunday to back all depositors, not stock, or bond holders of SVB.
Why did the government do what they did?
The government is trying to prevent a run on other banks and to prevent a full scale financial crisis. To do this, they provided an implied guarantee (backstop) to SVB depositors. What this means is that all deposits (even those held above the $250k FDIC limit) will be protected. The government also wanted the customers of the bank to have access to their deposits, to minimize the disruption SVB closure had on its many business customers. Businesses relying on SVB would have experienced severe operational disruptions, and potential insolvency (which would have led to a large increase in unemployment), to prevent this, the government stepped in.
Doing so, it appears that the Federal Government has taken the risk out of having deposits over $250k at a bank (we are still trying to determine if this will become an explicit guarantee from the FDIC). It seems likely at this time that this change will apply to Signature Bank and any others going forward.
What does this mean for you?
It means more investment volatility as uncertainty continues. It means that we all have to better understand what rules we are playing by as investors, savers, and depositors.
I believe in human innovation, human ingenuity, and a growth mindset, as such, I believe we must continue investing for the long-term even with the all the noisiness of politics, greed, and headlines dominating the news each day.
Please call us if you have any questions.
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